Why You Should Think Twice Before Buying Alcatel-Lucent

| About: Nokia Corporation (NOK)

Alcatel-Lucent (ALU) is heavily involved in the technology and communications business. The hardware required to keep Internet connectivity up to speed is a major focus. Its website specifies the company's involvement in better highway and rail management, energy, utilities, public safety and defense. On such scales, software and hardware issues are multifaceted, complex and constantly evolving. Thus, Alcatel-Lucent has to keep up with innovations such as the Cloud, fiber optics and mobile devices.

Though ALU stock could be used for short-term speculation, company fundamentals do not merit a long-term investment.

Alcatel-Lucent operates in a buyer's market, making it more difficult to turn around recent operating losses. The new "lean" business strategy has been tried before and seems short-sighted in its single-minded pursuit of cuts. Recent annual balance sheets, cash flow documents and income statements do not show consistent ability to maintain positive cash flow, income or liability management.

Product Details

Alcatel-Lucent products include a variety of routers for personal and institutional use. It is involved in 3G and 4G networks. Alcatel-Lucent's software services include operations management and optimization schemes. These prove useful in traffic analysis, security, project management, public policy and business strategy evaluation. Payment applications for mobile devices are a prominent division of ALU that has much growth potential.

Competitors and Earnings Outlook

Alcatel-Lucent has several formidable competitors such as Nokia (NYSE:NOK), Cisco (NASDAQ:CSCO) and Ericsson (NASDAQ:ERIC). Despite a tough competitive environment, Alcatel-Lucent beat analyst estimates in Q2 2013. Bloomberg Business Week details this development in a July 30, 2013 publication. Alcatel-Lucent's successful quarter is attributed to extensive cost cuts, asset sales and a minority stake purchase by Qualcomm.

As with many sectors of the economy, Asian enterprises can offer similar services for a much lower price than European or US companies. The Bloomberg BusinessWeek article specifically mentions Huawei, a Chinese electronics hardware company that directly competes with Alcatel-Lucent.

In Q2 2013, Alcatel-Lucent was estimated to generate $-0.10 EPS, a prediction that the company matched. The next quarter is predicted to be relatively better, with four analysts so far predicting $-0.06 EPS. By contrast, Cisco was estimated to have $0.48 EPS in Q2 2013, with the company beating estimates by delivering $0.51 EPS. The current quarter ending in 2013 is projected to be about the same, with an estimated EPS of $0.49. Ericsson did not do as good, with Q2 EPS of $0.13 substantially lower than estimated $0.18. Ericsson is now predicted to deliver $0.18. It is significant that Alcatel-Lucent's two largest competitors had solidly positive EPS in Q2 2013, with the trend very likely continuing into Q3 2013. By contrast, Alcatel-Lucent would count itself very lucky if its EPS climbed out of the red at all. Estimated earnings are forecast to remain negative until 2014.

Business Strategy Analysis

Alcatel-Lucent has been struggling in the recent past. Despite repeated efforts at a turnaround, the company has been bleeding profits. When Nokia , Ericsson and Huawei are luring away customers, Alcatel-Lucent management has plenty of cause for concern. Warren Buffett famously spoke of an investment-worthy company as a castle with an "economic moat." This moat will, to some extent, deflect competition and protect a profitable business model. Judging by analyst estimates for Q2 and Q3 2013 as well as other news and data, Alcatel-Lucent's major competitors have some defenses around their corporate castles. Alcatel-Lucent has leaky walls.

As mentioned earlier, Alcatel-Lucent recently implemented a cost-cutting spree. This "return to core business" is acknowledged by analysts with a relatively rosy EPS forecast for Q3 2013. However, it is important to keep in mind that while Alcatel-Lucent tries to get in shape, Ericsson, Cisco, and Huawei are not sitting by idly. The danger is that Alcatel-Lucent management will cut into crucial employees and assets critical to Alcatel-Lucent's chances of success.

Financial Statement Summary

Alcatel-Lucent's recent financial statements are not encouraging. Alcatel-Lucent shows mixed results with impressive positive net income in FY 2011 in between net losses in FY 2010 and FY 2012. The balance sheet shows persistently decreasing total assets in line with the cost cutting measures mentioned earlier. Alcatel-Lucent's liabilities have not gone down at the same pace, leading to decreasing stockholder equity. Cash flow gives a mixed-to-negative impression with a negative, though relatively small change in cash and cash-equivalents in FY 2012.

Final Note

Fundamentals do not paint a rosy picture. Ericsson and Cisco will very likely take advantage of Alcatel-Lucent's current weakness to try and siphon off the last of its customers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , , , Communication Equipment, Finland
Problem with this article? Please tell us. Disagree with this article? .